By Hayden Briscoe, AllianceBernstein
The visit to the US later this month by China’s President Xi Jinping comes at a politically sensitive time, with volatility in China’s markets — widely attributed to the effect of policy decisions — rippling globally. In our view, however, China deserves more credit than blame for its recent actions.
As China attempts to make the transition to a more open economy, two things are virtually inevitable: market volatility and difficult policy decisions, many of which need to be taken in the heat of the moment.
A case in point is the government intervention that followed the initial correction in the A shares market in July. This was widely interpreted outside China as a panicky reaction. But China’s share market is largely retail driven, and the need to maintain social harmony is of paramount importance to a single-party state. In light of this, the government’s response makes sense. Read more
The global commodity super-bubble is coming to an end. It is exactly a year since we forecast that a Great Unwinding of stimulus policies was underway, due to a major slowdown in China. As we warned on beyondbrics:
Oil and commodity prices are falling sharply as supply/demand once again becomes the key driver for prices; the US dollar is strengthening and liquidity is tightening across the world; equity markets risk sharp falls, as investors realise they have overpaid for future growth and rush for the exits; China’s economy is slowing fast as the new leadership implements the World Bank’s ‘China 2030’ plan; interest rates are becoming volatile as some investors seek a ‘safe haven’, while others worry that stimulus policy debt may never be repaid.
Today, it is clear that risks are rising in all these areas. And fewer people now believe that the problems can be magically wished away by a further round of stimulus – even if this was economically and politically possible. Read more
It was perhaps fortuitous that this month’s 70th anniversary of the atomic bombings of Hiroshima and Nagasaki followed so soon after the announcement that Iran had reached a deal with the US and others to step back from the nuclear brink. Whatever the critics say, the world’s most serious proliferation threat has been averted for now. By agreeing to reduce stockpiles of enriched uranium and accept stronger verification, Iran has extended the breakout period needed to build a nuclear weapon from two or three months to around a year, reducing the temptation for other countries in the region to take pre-emptive military action or acquire nuclear capabilities of their own.
This news is particularly welcome because elsewhere the nuclear arms control agenda has stalled and important agreements that defined the end of the Cold War have started to fray at the edges. Without a concerted diplomatic effort there is a danger that the world will slide unwittingly into a new era of nuclear competition. There is a pressing need for new multilateral initiatives and agreements that strengthen norms of restraint, co-operation and trust in the field of nuclear weapons policy. Read more
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As always, there is a great deal of noise around the Russia story and that makes it difficult for investors to identify the core issues with the greatest impact on risk. There is a lot of concern and speculation over the next steps in eastern Ukraine and the possible consequences for sanctions. Russia is also viewed as being among the most exposed to any deterioration in China’s growth outlook and from the yuan devaluation. On top of which is the daily battering from the sliding oil price.
There can be no argument that Russia is in a very precarious and even dangerous position. The 4.6 per cent preliminary estimate for GDP contraction in Q2 confirms that. But, cutting though the noise and discarding extrapolations and exaggerations, there are two core issues which investors should now be most focused on and which will provide guidance as to whether investment risk is deteriorating or improving. Read more
Wherever we look in the world, there are dark clouds overhead. The global economy remains fragile. Violent extremism is putting lives and stability at risk. Old tensions and divisions between nuclear powers have been re-awakened.
These divisions have again brought into sharp focus the terrible dangers that nuclear weapons pose to our world’s survival. Despite recent welcome reductions in the number of warheads, those that remain could destroy humanity many times over. This threat has been made far worse by the active pursuit of weapons of mass destruction by violent extremists who would not hesitate to cause unimaginable death and destruction.
It is against this sombre background that there have been, in recent weeks, two powerful signs of hope. Read more
More than 20 years after the Ukraine Independence Act that created the country I love, its future hangs in the balance once again.
Hostilities have resumed in Eastern Ukraine and the number of casualties is multiplying. Following three-way talks in Berlin on Monday, the leaders of Germany, France and Ukraine all reiterated the need to implement the Minsk cease-fire agreement hammered out this year in tense late-night talks involving Russia.
“We have only one single rule today and this is the full respect and implementation of the Minsk agreement,” said French President Francois Hollande. He is not alone in this view. Many in the west still cling to the hope of a political and diplomatic solution to the conflict in Ukraine.
Yet to imagine at this stage that Russia suddenly intends to abide by the Minsk II agreement is naïve, wishful thinking. Read more
By Derek Scissors, American Enterprise Institute
Stock market volatility and a small currency devaluation have in the past few months caused the financial community to take note of Chinese economic weakness. A natural question is what effect this weakness will have on the rest of the world. The answer is very little, with most important reason being that China has not truly contributed to the global economy for at least four years.
The idea that Chinese weakness threatens the world economy melds a number of misconceptions. The first is that the weakness is a new phenomenon. It was actually the initial stock market climb and a rising renminbi that were somewhat surprising; the ensuring partial corrections were late in coming, if anything. Read more
By Benjamin Sporton, World Coal Association
Over recent weeks, World Bank climate change envoy Rachel Kyte has made a number of comments claiming that coal is not part of the solution to energy poverty. Pointing to investments being made globally in renewable energy, Kyte argues that coal is a fuel of the past, which we all need to be “weaned” off.
But her comments do not match up with the numbers. The International Energy Agency (IEA) forecasts coal use in electricity generation to grow 33 per cent by 2040. Demand for coal in Southeast Asia alone is expected to increase 4.8 per cent a year through to 2035. Read more
By Arturo C. Porzecanski, American University
During the past dozen years, Argentina has been a destabilizing economic force within South America. While the governments of Néstor (2003-07) and Cristina Kirchner (2007-15) have not meddled in the internal affairs of other countries in the way that Venezuela did under the late Hugo Chávez, their highly populist and nationalistic policies have had adverse repercussions on Argentina’s neighbours.
For example, a decade ago Argentina defaulted on a 1995 commitment to export natural gas to Chile, and did so in order to keep its domestic market amply supplied and thus at lower gas prices. As a result, Chile had to scramble to find alternative energy providers, and the country had to increase its dependence on then-expensive imported oil. Read more
By Alireza Jafarzadeh, National Council of Resistance of Iran
August 14th marks exactly 13 years since the day I walked into a conference room at the Willard Intercontinental Hotel in Washington, DC to reveal the existence of Natanz and Arak nuclear sites in Iran for the first time. The revelation triggered an international response that has continued to this day.
The international community owes a huge debt of gratitude to the main Iran opposition movement, the Mujahedin-e Khalq (MEK), for its diligent and continuing efforts to unmask Tehran’s clandestine nuclear weapons program. Without it, the mullahs would have had the bomb by now. Read more
By Neville Mandimika, Atria Africa
Since Ben Bernanke suggested that the US Federal Reserve was starting to consider slowing down its asset purchase program (QE), markets have been trying to price this in. The difficulty has always been in the timing of the ‘lift-off’ as the Fed has insisted that it all depends on the data. Read more
By Paul Segal and Ingrid Bleynat, King’s College London
Argentina’s macro-economic policy has been accused of being incoherent, inconsistent, and out of control. Analysts blame ‘populist handouts’ for President Cristina Fernández de Kirchner’s popularity. Yet that cannot explain approval ratings around 50 per cent after nearly 8 years in power. There is a logic, and a history, behind Argentina’s policy that observers are overlooking.
Consider the challenge facing the government. They were elected to support domestic industry, and to redistribute income in favour of middle and lower class workers. What to do? Enter the economic theory of the second best, also known as (heavily) constrained optimisation. Read more
By David Lubin, Citi
You often hear economists and investors talk these days about the ‘broken growth model’ in emerging markets. It isn’t a terribly precise term but it’s easy to see what people mean. The problem in EM is that none of the three possible sources of GDP growth – exports, or public domestic spending, or private domestic spending – have much going for them.
Exports from EM are hobbled by a collapse in the growth of global trade and the related fall in world commodity prices. Public spending growth is weak because many governments are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when the outlook for capital inflows isn’t encouraging. And private domestic spending is hampered by the fact that credit markets in many countries are in ‘post-boom’ mode: neither domestic lenders nor borrowers have much in the way of risk appetite. Read more
By John Davies, Standard Chartered
China is the second-largest investor in US government bonds (or US Treasuries), trailing only the US Federal Reserve, but as the renminbi becomes more international, Chinese demand could drop, with significant implications for US yields.
The International Monetary Fund (IMF) is scheduled to decide later this year whether to include the RMB in its Special Drawing Rights (SDR) currency basket. In our view, China’s currency now meets the technical requirements for SDR inclusion, and we see a better than even chance that the IMF will add the renminbi.
Beijing appears to have taken up the challenge of the SDR review this year by accelerating the liberalisation of China’s capital account. However, this liberalisation cannot be achieved with a fixed RMB, so China, as this month’s move by its central bank has demonstrated, is likely to be heading towards a floating currency regime. Read more
By Márcio G. P. Garcia, Lucas Maynard and Rafael Fonseca
The deterioration of the Brazilian economic situation in the last few months is quite impressive. Looking through a few of the recent economic indicators, the only ones that are pointing up are the ones that you would like to see going down: inflation, unemployment, delinquency rates, interest rate and public debt.
Despite an economic policy U-turn in the second Dilma Roussef´s government, represented by the substitution of the heterodox Finance Minister Guido Mantega by the University of Chicago-trained Joaquim Levy and by the Brazilian Central Bank’s much tougher monetary policy stance, the government has not been able to contain a deterioration in the expectations. The confidence indicators are at their lowest level in history, indicating that not only is the situation dire, but also there is no likelihood of it getting any better in the short term. Read more
How do you classify the countries known as emerging markets (EM)? That question has become more relevant since the FT declared the EM term unhelpful and obsolete as a definition.
So what should replace the EM term? Alexander Kozhemiakin recently argued that investors should look at the risks affecting an EM’s growth to get a sense of how safe their investments in particular markets might be.
Andrew Karolyi, a professor of Emerging Market Finance at Cornell’s Johnson School, however, also focuses on measuring risk, and has come up with a matrix to do so. In his book “Cracking the Emerging Markets Enigma”, Karolyi ranks 57 emerging markets and developed markets by averaging their score on six components. Read more
By Eric Farnsworth, Council of the Americas
July was bad for Mexico, the month ending with news of a gangland-style murder of journalist Ruben Espinosa and four others in Mexico City. It was the latest in a lengthening line of journalists targeted and killed for their profession — 370 over the past 10 years, according to the Committee to Protect Journalists.
Coupled with the spectacularly embarrassing escape of drug lord Joaquín “El Chapo” Guzmán from his maximum security prison cell, as well as perceptions of corruption and self-absorption that continue to swirl around the ruling class, the political mood has turned sour. Headlines proclaiming that the 2012 election of President Enrique Peña Nieto would usher in “Mexico’s moment” seem long ago and far away. Read more
“Integration” within regional geographies has been a powerful driving force behind the macroeconomics of many emerging markets in recent years.
Perhaps the least well-known of these is the far-flung Pacific Island nations, which remain far off the radar for most investors due to their small populations that inhibit scalable businesses.
Yet the Pacific Islands – including Fiji, Samoa, Papua New Guinea, East Timor, the Solomon Islands, Tonga, and others – have plenty or reason to work together. Read more
Everybody seems to be greedily eyeing potential business deals with Iran after the nuclear deal reached with six world powers. This is no surprise. Iran’s economy is larger than Australia’s and twice as large as Iran’s successful neighbour, the UAE. More importantly, Iran is set to grow even faster. In fact, even under the most conservative projections (before the deal was signed), Iran was set to contribute nearly as much as Italy to global growth in the next decade: some $270bn. Beyond its large and starved domestic market after so many years of sanctions, Iran’s oil and gas reserves are the jewels in the crown. Read more